Taking stock of the VW settlement agreement

On June 28, more than 9 months after the "Dieselgate" story broke, Volkswagen agreed to a $14.7 billion partial settlement designed to do three things: compensate consumers for advertising fraud; promote electric vehicles; and clean up excess air pollution from the nearly half a million deliberately defective diesel cars sold into the US market for 7 years. While the settlement is incomplete—it does not include civil and possible criminal penalties, nor does it address the 85,000 3-liter diesels outfitted with defeat devices that VW sold in the U.S.—we know enough at the moment to step back and assess the results as they currently stand.

Prior to Dieselgate, the general practice at EPA and the California Air Resources Board (CARB) was to selectively spot check, in their own laboratories, the emissions test results that manufacturers reported to regulators. The regulators would also perform additional lab testing when a manufacturer proposed to install a novel emissions control technology, such as VW’s proposed lean NOx trap in 2009. Except for the collaboration that started between the ICCT and CARB in 2013, agencies did not test passenger vehicles under normal driving conditions. As a result, the diesel Jetta easily passed the EPA lab tests in 2009.

Historically, EPA and the Justice Department have imposed financial penalties for Clean Air Act violations that were well below the legal maximum, which is currently $37,500 per vehicle. My review of the six major defeat device cases involving light-duty and heavy-duty vehicles over the 20 years prior to the VW settlement reveals that penalties ranged from $96 and $292 per vehicle, averaging just under $160 per vehicle. If this amount were applied to VW, the total settlement would be just under $80 million, a tiny sum to a company with annual operating profits of more than 11 billion Euros from 2011 to 2014.

The current proposed settlement—a whopping $29,000 per vehicle, or 185 times the historic average—brings the average financial assessment per vehicle far closer to the legal limit. And it’s likely to go higher once civil penalties are assessed, along with a full settlement for the 3-liter diesel cars.

History of Defeat Device Settlements

Company

Year

Settlement (Millions)

# Vehicles

$/Vehicle

Description

GM

1995

$45

470,000

$96

CO emissions 3 times legal limit during heating and air conditioner operation

VW’s attempt to cover up its use of defeat devices for more than a year—first in discussions with California, then with EPA – left the company with little credibility entering into the settlement negotiations.

It seems clear that past settlements have not deterred continued misconduct, and it’s plausible that modest financial settlements may have inadvertently influenced VW’s illegal behavior.

There are some genuine signs that VW has learned some important lessons from the global scandal. It’s getting its own house in order in Europe: Real world emissions data published by Germany’s type approval agency show that the 2016 Audi A3, VW Passat and Touran are the cleanest diesel cars tested. And it’s looking towards the future. Last month, VW announced “Strategy 2025,” which includes more than 30 new electric vehicle models by 2025, and annual sales of two to three million. That’s the equivalent of 20% to 25% of VW total vehicles sales.

Only time will tell whether the size of this settlement is sufficient to deter future use of defeat devices. But considering how much the likelihood of discovery and the magnitude of the consequences have increased in just nine months, it’s clear that the odds in favor of a genuinely cleaner transportation sector have changed dramatically for the better.